Let us get the required disclaimer out of the way: We are not accountants, and we’re not encouraging anyone to break the law. Tax audits are no fun, so please don’t blindly accept this advice without first consulting with a qualified professional.
With that said, it is possible for freelancers, entrepreneurs, and business owners to write off at least some of their vacation days as a tax deduction. By fulfilling a few straightforward requirements, time spent sipping Tiki cocktails on the beach in Kauai could be legally deducted — mostly. With the U.S. income tax deadline on the horizon, here’s what you need to know.
Your Business Trip Must Have a Legit Business Purpose
In a nutshell, a trip can be considered business-related if it has legitimate potential to generate revenue. That requirement covers a range of things. Attending or speaking at a professional conference, meeting with clients, conducting research for a business, or holding meetings with employees or shareholders are all acceptable.
Keep It Ordinary and Necessary
The IRS provides guidelines for allowable business travel-related deductions. These include obvious things like travel itself (by plane, train, rental car, etc.), taxi rides, hotel stays, non-entertainment-related meals, and even dry cleaning. The litmus test is that they be “ordinary and necessary.” According to Investopedia, “ordinary means that the expense is common in the industry and most business owners in the same line of business or trade would potentially expense these things. Necessary means that the expenses help in doing business, are appropriate, and a business owner might not be able to handle the business if s/he did not make the expenditure.”
This might seem open to interpretation and, to some degree, it is. Be reasonable and honest. If it passes the smell test — if you’re not trying to smuggle a personal line item into the business column — the IRS is more likely to accept it. That extends to things like splurging on a luxury hotel stay or upgrading to first-class air travel when a budget alternative would suffice. If staying at a Holiday Inn is typical for your business, it’s going to be harder to justify why you chose to splash out for a corner suite at the Four Seasons.
As far as the IRS is concerned, there are no day trips in business. To qualify as a business trip, an overnight stay is required. While away, business owners must also be working more than not. That means, in a typical eight-hour day, you would need to work more than four hours for that day to qualify. Here again, it pays to be reasonable. Attending two hour-long sessions of a conference over the course of a week in Jamaica doesn’t make your obvious tropical vacation a legit business trip. “Sandwiching” a personal weekend in the middle of a week-long business trip can qualify, however.
Domestic vs. International Travel
The IRS is a finicky beast. For whatever reason, it does not treat domestic and international business travel the same. Trips taken with the United States are considered deductible if the tax filer works more than half the time. Outside the country, however, deductions are proportional. If you only worked 10% of the time while traveling in Jamaica, only 10% of your trip would qualify.
For any business owner, especially those filing taxes as self-employed individuals, documentation is critical. This is doubly true for tax-deductible expenses. Ruthlessly document everything. A lack of hard details is a red flag for the IRS. Keep every email related to hotel stays, airfare costs, rental car receipts, conference tickets — everything. If a deduction is associated with a client, like a meal or a show, keep any relevant receipts and note who you met with and why.
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